The classical recipe for asset-stripping arises when the realizable market value of the firm’s assets are much greater than what it would cost the predator to buy the firm; i.e. where there is a marked discrepancy between the asset-backing per share of the target firm and the price per share required to take the firm over. This discrepancy usually results from a combination of two factors:
(a) gross under-valuation of the firm’s assets in the BALANCE SHEET;
(b) mismanagement or bad luck, resulting in low profits or losses, both of which serve to depress the firm’s share price.
asset-value theory (of exchange rate determination) an explanation of the volatility of EXCHANGE-RATE movements under a FLOATING EXCHANGE-RATE SYSTEM. Whereas the PURCHASING-POWER PARITY THEORY suggests that SPECULATION is consistent with the achievement of BALANCE-OF-PAYMENTS EQUILIBRIUM, the asset-value theory emphasizes that, in all probability, it will not be. In this theory, the exchange rate is an asset price, the relative price at which the stock of money, bills and bonds and other financial assets of a country will be willingly held by foreign and domestic asset holders. An actual alteration in the exchange rate or a change in expectations about future rates can cause asset holders to alter their portfolios. The resultant change in demand for holdings of foreign currency relative to domestic currency assets can at times produce sharp fluctuations in exchange rates. In particular, uncertainty about future market rates and the unwillingness of banks and other large financial participants in the foreign-exchange markets to take substantial positions in certain currencies, especially SOFT CURRENCIES, may diminish funds for stabilizing speculation that would in turn diminish or avoid erratic exchange-rate movements.
If this should prove the case, then financial asset-switching is likely to reinforce and magnify exchange-rate movements initiated by current account transactions (i.e. changes in imports and exports), and in consequence may produce exchange rates that are inconsistent with effective overall balance-of-payments equilibrium in the longer run.
assisted area an area of a country designated as qualifying for financial and other assistance under a country’s REGIONAL POLICY in order to promote industrial regeneration. Assisted areas typically suffer from severe unemployment problems resulting from the decline of local firms and industries and are characterized by INCOME PER HEAD (GDP per capita) levels that are substantially below the national average.
In the UK, the main assisted areas are ‘Tier 1’ areas (formerly DEVELOPMENT AREAS) and ‘Tier 2’ areas (formerly INTERMEDIATE AREAS). These arrangements came into force in 2000 as part of a European Union (EU) programme aimed at establishing a comparable regional aid system across all the then 15 EU member states. Under EU policy, the main criteria for designating an assisted area is a GDP per capita that is below 75% of the EU average.
In the case of the UK, the areas proposed by the government, based on electoral voting ‘wards’, are still under review by the European Commission. Proposed Tier 1 areas are Cornwall and the Scilly Isles, Merseyside, South Yorkshire, West Wales and the Valleys, together with the whole of Northern Ireland. Proposed Tier 2 areas, totalling some 1550 smaller localities, are 79 from the east of England region; 133 from the East Midland region; 44 from the London region; 228 from the Northeast region; 144 from the Northwest region; 440 from Scotland; 129 from the Southeast region; 20 from the Southwest region; 51 from Wales; 197 from the West Midlands region and 91 from the Yorkshire and Humber region. Regarding Tier 2 submissions, the European Commission’s preferred policy is to support ‘clusters’ of adjacent localities, providing sufficient ‘critical mass’ for industrial development rather than isolated localities.
In addition, a ‘Tier 3’ of assisted areas has been designated that covers areas of ‘special need’ (for example, coalfields and rural development areas).
The application of the new Tier structures is subject to an overall population ceiling requirement; specifically, for any country the number of persons residing in the assisted areas should not exceed more than 28.7% of the total population of the country. See REGIONAL DEVELOPMENT AGENCY.
associated company a JOINT-STOCK COMPANY in which another company or group has a significant, but not controlling, shareholding (specifically 20% or more of the voting shares but not more than 50%). In such a situation the investing company can exert influence on the commercial and financial policy decisions of the associated company, though in principle the associated company remains independent under its own management, producing its own annual accounts, and is not a subsidiary of the HOLDING COMPANY.
Association of British Insurers see INSURANCE COMPANY.
Association of Futures Brokers and Dealers (AFBD) see SELF-REGULATORY ORGANIZATION.
Association of Investment Trust Companies see INVESTMENT TRUST COMPANY.
Association of Southeast Asian Nations (ASEAN) a regional alliance formed in 1967 with the general objective of creating a FREE TRADE AREA. The current member countries of ASEAN are Brunei, Indonesia, Malaysia, Philippines, Singapore and Thailand. However, only limited progress has been made to date towards the reduction of internal tariffs and quotas. See ASIAN PACIFIC ECONOMIC COOPERATION, TRADE INTEGRATION.
assumptions see ECONOMIC MODEL.
assurance see INSURANCE.
asymmetry of information a situation where the parties to a CONTRACT or TRANSACTION have information available but this information is unevenly distributed between the parties. This information could include the identity of alternative suppliers or customers or product quality or performance.
Asymmetry of information is likely to lead to ADVERSE SELECTION or to MORAL HAZARD in transactions. Asymmetric information also applies to the principal-agent relationship (see AGENCY COST) where the principal cannot observe the agent’s level of effort. See PRINCIPAL-AGENT THEORY.
ATM see AUTOMATIC TELLER MACHINE.
atomistic competition see PERFECT COMPETITION.
attributes model see PRODUCT CHARACTERISTICS/ATTRIBUTES MODEL.
auction a means of selling goods and services to the highest bidder among a number of potential customers. Auctions can take several forms. One form is an open auction, increasing bid, competition in which the bids of all parties are observable and bidders drop out as the price increases until only the highest bidder remains. Another form is an open auction, decreasing price, auction in which the auctioneer starts off from a very high price that is then slowly decreased until one bidder agrees to buy at the last announced price. This form of auction is often called a ‘Dutch auction’. Yet another form is a sealed-bid, closed auction in which all bidders have to submit their bids in sealed envelopes at the same time. In open auctions, bidders can gain some information about the private valuations that other bidders place upon the goods to be sold, while in sealed-bid auctions the private valuations of bidders remain unobservable. The principles of auctions apply to situations where firms seek tenders to supply products.
audit the legal requirement for a JOINT-STOCK COMPANY to have its BALANCE SHEET and PROFIT-AND-LOSS ACCOUNT (the financial statements) and underlying accounting system and records examined by a qualified auditor, so as to enable an opinion to be formed as to whether such financial statements show a true and fair view and that they comply with the relevant statutes. See also ENVIRONMENTAL AUDIT, VALUE FOR MONEY AUDIT.
Austrian school a group of late 19th-century economists at the University of Vienna who established and developed a particular line of theoretical reasoning. The tradition originated with Professor Carl Menger who argued against the classical theories of value, which emphasized PRODUCTION and SUPPLY. Instead, he initiated the ‘subjectivist revolution’, reasoning that the value of a good was not derived from its cost but from the pleasure, or UTILITY, that the CONSUMER can derive from it. This type of reasoning led to the MARGINAL